Once in a while, we’ll get asked this question:

Does Zharta get custody of my assets when I lend or borrow?

TLDR: No.

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But WHO gets custody, then?

No one! Zharta is a non-custodial protocol.

Through the magic of Smart Contracts, neither borrowers, lenders, nor protocol gets custody of the assets when you use them at Zharta.

Say someone gets a 30-day loan against an NFT. When they agree to the terms, they allow the protocol to place their collateral in the Smart Contract Escrow.

A Smart Contract is nothing more than code deployed onto the blockchain. In this case, the code is set to follow the conditions the borrower picked for the loan automatically, with no need for a 3rd party to intervene.

So, if this borrower repays their loan within 30 days, the Smart Contract will return their NFT.

If not, their loan will default, but they’ll still have a 48-hour “Grace Period” during which they can recover their collateral by repaying the loan plus a penalty fee. After that, the loan will default in earnest, and the NFT will be put up for sale for the same pool’s lenders during the 48-hour-long “Buy Now” period.

Only if this last step doesn’t result in a sale does Zharta get custody of the collateral, as it falls upon the protocol to sell it to recover liquidity for the pool.

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Ok…but that’s NFTs. What about Lenders’ funds?

Same TLDR: Zharta does not have access to lenders’ funds.

One Smart Contract (to rule them all) contains the data for all deposits, loans, and returns, and manages funds accordingly. The Zharta team couldn’t touch the funds even if we wanted to.

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Does it matter whether a protocol is Custodial or Non-Custodial as long as it’s legit?

Non-custodial makes perfect sense for us since it allows for trustless transactions. Since Smart Contracts manage all assets and contract mechanics, you don’t need to trust either the team behind the protocol or the lenders — you only need to trust the smart contracts themselves.

That is why third-party audits are crucial: they allow even users who have never coded in their lives to know that the Smart Contracts do what they say they do.

Custodial protocols have access to your assets. If managed correctly, that can be beneficial. Like TradFi banks, they may invest your funds and give you a share of the returns.

Such protocols do require trust, however — even if they are “legit” (i.e., not a rug-pull). You don’t merely need to trust their intentions but their competence. A TradFi bank doesn’t have to break the law to fail — it only needs to be mismanaged or even to get unlucky. If a custodial protocol’s investments go poorly, YOUR funds are on the line.

When you lend at Zharta, you know how your funds will be used. You can read our documentation, study each pool’s risk profile, and make your own decisions.

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Where can I read a more detailed and technical explanation of how your Smart Contracts work?

Check our documentation for more info. You can also ask us about it on Discord or Twitter. We’d be happy to clarify or go more in-depth!